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Chesapeake Dominates with $7.4B Southwestern Buy01/29/2024
- Focus: Increased LNG export demand
- Post-merger production: 7.9 Bcfepd capacity
- Chesapeake shareholders will own about 60% of the combined company
- Up to 20% of future production will be tied to international pricing
Chesapeake Energy has agreed to purchase its competitor, Southwestern Energy, in a $7.4 billion all-stock deal. The acquisition anticipates a boost in natural gas demand with new U.S. LNG export terminals coming online in 2025.
With a combined output of about 7.9 billion cubic feet per day, the new entity will surpass EQT Corp, becoming the largest independent U.S. natural gas exploration and production company in terms of market value and production.
When Chesapeake and Southwestern combine, they'll be worth around $24 billion. This makes them strong competitors to companies like Chevron and EQT.
This merger is part of a trend where U.S. oil and gas companies are joining forces. For example, Chevron recently planned to buy Hess for $53 billion. And before that, Exxon Mobil agreed to purchase Pioneer Natural Resources, a big player in Texas's Permian Basin, for $60 billion.
Chesapeake's CEO, Domenic Dell’Osso, who will lead the merged entity, remarked, "By combining our companies, we are LNG-ready."
New Start, New Goals
The deal is slated for completion in the next quarter. Nick Dell’Osso as President and Chief Executive Officer of the combined company highlighted the rising demand from LNG exporters as a key driver for the merger. He noted that up to 20% of the new company's production is expected to be linked to international market prices.
“This powerful combination redefines the natural gas producer, forming the first U.S. based independent that can truly compete on an international scale.”
- Nick Dell’Osso
The merger of Chesapeake and Southwestern will significantly boost their capacity, as noted by Matt Portillo, an analyst at Tudor Pickering & Holt. He sees this as a chance to unlock new LNG opportunities. In recent times, U.S. gas production has exceeded domestic needs, leading to high inventories and lower profits. Currently, U.S. gas is trading at about $3 per million British thermal units, a notable drop from last year's prices.
“Bringing Chesapeake and Southwestern together will reduce overall costs.”
- Peter McNally, an energy analyst at Third Bridge
This acquisition marks Chesapeake's largest step in reclaiming its position as a top U.S. gas producer after its 2021 bankruptcy restructuring. Last year, they expanded in the Northeast U.S. shale regions with a $2.5 billion acquisition of Chief E&D.
Kimmeridge Energy Management, an investor in both firms, backs the merger. They see it as a strategic shift from oil to gas production. Southwestern's main output comes from the Appalachian shale and the Haynesville shale, which is near U.S. LNG export facilities.
The Chesapeake and Southwestern merger, set to wrap up in the next few months, will launch under a new name. This ends the Chesapeake brand, which started about 35 years ago. After the merger, Chesapeake's current owners will have about 60% of the new company, with Southwestern's owners getting the rest.
About Chesapeake Energy
Chesapeake Energy, known for its role in pioneering shale gas extraction, has been key in making the U.S. a net natural gas exporter. However, it's been a rough road lately. In 2020, the company filed for bankruptcy with over $20 billion in debt, largely due to the actions of co-founder Aubrey McClendon, who aggressively expanded operations more than the market demanded.
McClendon, who started Chesapeake in 1989, pushed hard in shale gas extraction in Texas, Louisiana, and Oklahoma, making Chesapeake a top gas producer in the early 2000s. But by producing too much gas, the company struggled, especially when the industry shrank in the early 2010s. McClendon left in 2013 amid corruption allegations and sadly passed away in 2016.
By 2021, Chesapeake bounced back, cutting down its debt and growing again. It bought Vine Energy and increased operations in Louisiana and East Texas's Haynesville Shale region.
Meanwhile, Southwestern Energy, mainly active in Appalachia, had about 90% of its production and 75% of its reserves there in 2021. The rest of its reserves are in the Haynesville Shale area. This geographical spread gives the newly merged company great chances to grow.
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